Market Failure? Or Policy Failure? Throwing fuel on the Ethanol fire...

Ethanol's Growing List of Enemies

Here's an interesting article on the backlash against the US government's overzealous promotion of corn-based ethanol as a fuel alternative to foreign oil. This article presents a perfect application of economic theories as learned in AP and IB economics. Government subsidies to ethanol refiners is shifting out the individual ethanol firms' Supply curves and as a result the market Supply curve for ethanol outward. In order to produce all this new fuel, the demand for ethanol's main ingredient (corn) is shifting out as well, leading to higher corn prices. So what, you say? Well, turns out corn is an important ingredient in almost everything Americans eat, not just the tasty yellow corn on the cob, but thousands of other food products, including MEAT! Yes, our meat is made out of corn, who would have thought! (Of course, this is because cows and chickens and pigs EAT corn themselves.)

So, applying what you've learned about supply and demand, you should be picturing in your head thousands of meat and other food producers' individual supply curves shifting inward, as the resource cost (corn) goes up! How does this affect us, the consumers? Well, what happens to the price of all those food products that rely on corn when their supply curves shift in? Ah ha, now you see the big picture.

We want cleaner air, less glacial ice melt, stable sea levels, and energy independence... all good things, right? And the US government seems to have decided that ethanol is the solution... so what's the problem? Well, for one, the government has placed high tariffs on ethanol made from sugar. Why? Think about it... where is sugar grown? Or better yet, where is sugar NOT grown? (think of all those voters across the Great Plains states... are they in their fields hacking down sugar cane? I don't think so). So, now we see maybe this ethanol program is about more than just clean air, stable sea levels, and so on... could it be about politics too? Why, as the article says, are all the main presidential candidates in support of corn-based ethanol subsidies? Hmm... can anyone spell "Iowa Primary"?

Politics aside, this article also makes interesting connections to our recent units on Market Failure. Could it be that the true social cost of ethanol is not being realized in the prices paid by consumers? What externalities may result from the production of this so-called "clean" source of energy?

Here's a couple of key quotes that relate to our studies in AP and IB economics that I found interesting:

"The government thinks it can pick a winner, but they should allow consumers to pick their own."

"The government should stay out of energy markets and let the best fuels win."

"Why are we supporting ethanol with a mandate, but not wind and solar?"

In my view, these are some interesting points rooted in basic economic theory. Perhaps rather than lavishing the corn-based ethanol industry with billions in subsidies, the US government should focus more on internalizing the external costs of the oil industry... whether through taxation, tradeable permits, or other methods we learned about in class. If, after all, the goal is (as politicians claim) to clean up the environment, then we should start by correcting one market failure (overconsumption of dirty fuels), before attempting to tackle another (underconsumption of clean fuels). Then let the market decide which clean fuels it prefers... and leave politics OUT of it!

Students, please contribute your comments... this is right up your alley as AP and IB students!

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